We humans are physical and social beings. We like to interact with people and things physically. Overlooking this simple fact and assuming digital interactions can substitute our inherent desires of touch and feel would fundamentally challenge what makes us human.
Many of the endeavours with e-commerce tend to overlook this simple fact. We look at trends such as the rapid adoption of digital lives and think more people will therefore embrace e-commerce. While there is certainly a strong correlation between these two things, I think we make the mistake of interpreting the correlation as causality. This is really not that different from the history of mankind's attempts to fly, when for centuries we thought wings and feathers were what we needed to fly (since birds had them) and had people strapping on wings and jumping off tall structures. It was not until 1738 when Bernoulli's book Hydrodynamica explained the concept of lift, that we fully understood the causality behind flight.
Some of the early efforts in e-commerce suffered from the correlation syndrome. At the global level, we saw pets.com, furniture.com, living.com, and many-other-dot-com efforts. They were all trying to sell things that did not make economic sense for the web. In Bangladesh too we see similar examples. But without actually naming names, let me underscore the fact that many of these players are spending significant marketing budgets today without a sufficiently strong business model. They stand the same risk of creating online ventures that do not make economic sense.
The e-commerce market, at the global level, is coming of age. The fundamental question is no longer how we build digital experiences online to replace physical experiences. The real question is in fact how we combine digital and physical experiences to create a compelling value proposition for the end user. The truth is that both the digital world and the physical one are indispensable parts of life and business. The real transformation that is taking place today is not the replacement of one by the other – it is the marriage of the two into combinations that create wholly new sources of value. pi Strategy Consulting calls this phenomenon “pe-commerce” – short for physical and electronic commerce – we think it is likely to reshape not only the way people live, but the way companies operate.
Some of the global leading players have already made this realisation and are re-orienting their business strategy accordingly. Let's take the undisputed poster child of e-commerce success, Amazon, as a case in point. The Wall Street Journal in October 2014 reported that Amazon will be opening its first physical retail store in New York. By utilising its physical sites as distribution centers, Amazon can deliver products to some customers even more quickly and therefore compete more directly with other brick-and-mortar outlets. Same-day delivery, and ordering online and picking up at the store are ideas that are really catching on, and Amazon can be at the forefront of this industry-wide shift.
eBay's United Kingdom operations have launched a program with a partner, Argos, whereby customers can order eBay goods online and pick them up in Argos stores. Over time, this service will be made available at any of the 650 Argos stores across the country.
Such shifts into pe-commerce are beginning in South Asia as well. Flipkart, India's largest e-commerce venture, has announced the launch of a number of physical retail stores. India's leading travel sites Makemytrip and Yatra havephysical presences. Makemytrip launched its first retail store in 2012 and has expanded to 20 some outlets across India. Yatra has as many as 40 franchisee outlets and is planning another 100.
pi Strategy Consulting analysis has revealed three primary reasons for the big shift to pe-commerce.
The first reason is market size and market opportunity of the physical world. According to US Government census data, out of an estimated USD 1.1 trillion in U.S. retail sales in the second quarter of 2014, only 75 billion, or 6.4 percent, of total retail sales came from e-commerce. The story is similar in India, where retail is a whopping USD 490 billion market but only 10 percent of that is organised. And, according to ZDNet estimates, online is a tiny 0.02 percent of that organised retail total (i.e. USD 3 billion), with a 50 percent growth rate. In other words, despite the rapid growth rate of the e-commerce market, the lion's share of retail sales is still done within traditional physical stores. This is predominantly why the large traditional e-commerce players are foraying into the pe-commerce domains. They want a slice of the (much) bigger pie.
The second reason is distribution network. A critical success factor for e-commerce is fast and reliable delivery of products purchased online. An online retailer may have a wide selection of products, another may offer very low prices, and yet another player may offer great after-sales support. But all of them need to ensure that the products they sell online are delivered to the buyer on time. Physical presence opens up the opportunity to leverage retail outlets as distribution centers. This allows the retailer to bring the product closer to the customer.
The third reason is touch and feel. More hands-on experiences lead to more sales. Most of the products sold online are non-digital. They are physical products: a saree, a pair of shoes, a book, a mobile phone, etc. Seeing, touching, fitting, feeling – any of these things are important parts of the decision to buy. Think of the last time you bought any of these products. Did you purchase them from an online store or from a physical store? Would you be (could you be) equally comfortable buying those products from either of those two types of stores? Of the products I listed above, the mobile phone is an electronic product. And yet, even for electronic products such as a mobile phone, the physical dimension is a very important factor in the purchase decision. Take Apple for example. Apple found unprecedented success with its mobile device sales by combining an online retail presence with physical retail stores. According to market research firm eMarketer, Apple leads the physical retail marketplace with the highest sales per square foot of any other US-based retail store, with an average of USD 4,550 in sales per square foot.
Even when we do buy some of these products online, our past physical experiences with the products weigh heavily on our purchase decision. My wife and I order meals through Foodpanda sometimes. Every time we order food through this e-commerce service, we order from restaurants where we have had dinners in person in the past. The firsthand experience we had at those restaurants (quality of service, ambience, and of course quality of food) has influenced our decisions, either consciously or subconsciously. Our experience is not that uncommon.
Real value is created when the electronic and physical experiences are seamlessly integrated in the form of pe-commerce. Studies show that a customer who shops both online and in physical stores generates five times the profit of someone who shops only online. The integration can happen in many ways. Stores can be used as distribution centers. Items bought at stores can be shipped direct to buyers. Online orders can be fulfilled from stores when an item is out of stock in online warehouses. Items bought online can be picked up at stores. But such levels of integration require a lot of analysis and planning. Without it, we could be building services that do not enjoy high rates of adoption. The integration also requires considerable investments. But the payoff can be significant too. Macy's, one of the largest physical retail chains in the US, invested nearly USD 200 million in macys.com in 2006/2007. Between 2010 and 2013, its stock price rose steadily, increasing 43 percent in 2013 alone (compared to an increase of 28 percent in the S&P 500 index during the same period).
The pe-commerce concept makes even more sense for Bangladesh. pi Strategy Consulting analysis indicates that most of the transactions that are categorised as e-commerce in Bangladesh involve cash-on-delivery. We estimate this to be about 80 percent of the total transactions today.
One reason for such high percentage of payments being made through cash-on-delivery is of course the limited availability of electronic payment mechanisms in our country. On one hand, less than one-third the population has formal bank accounts, and a smaller percentage of those with bank accounts have credit cards that can be used for online purchases. On the other hand, despite the hoopla surrounding mobile banking, when you consider the facts that the vast majority (over three-fourth) of the mobile banking transactions are over-the-counter (OTC) transactions, and that less than one-tenth of the registered users are real, active end-users, you quickly see the limited prospect of using mobile banking wallets for e-commerce. This is why debit cards, credit cards and mobile banking wallets collectively constitute at best 20% of the e-commerce payments today.
The other more critical reason for high percentage of cash-on-delivery transactions in e-commerce today is our lack of trust in the e-commerce vendors. When you cannot fully trust a vendor, you want them to bring the product to you first, make sure it is what was advertised, and only then make the payment. Our analysis indicates that a considerable percentage of those who have the ability to use electronic payments for e-commerce purchases, choose not to use electronic payments specifically to offset this trust dimension.
Would the adoption of a pe-commerce strategy really make a difference? I certainly think it would. Why do we buy products from a newly opened corner store without really thinking as much about trust? Surely some of the new online stores deserve the same level of trust from us. But we find it more difficult to trust an online store than a physical store. This seems to be true even if the online store was selling better quality products compared to the physical store. Why is that?
First, there's something about the fact that one is physical while the other is not that influences our behavior. We know exactly where the physical store is. There is actually a person we are interacting with when we are purchasing. If we have issues with the product, we know where to go and who to talk to so that we can sort things out. We perceive the combination of these experiences as trust.
Second, the physical store, by definition, satisfies our inherent desire to touch and feel a product before we finalise a purchase decision. This helps both the buyer and the seller. For the buyer, it provides some interaction with the product and helps in the decision-making process. For the seller, it helps to close the sale. When you buy a light bulb at a store, the shopkeeper tests the bulb in your presence, you are happy it works, the shopkeeper is happy he has demonstrated it works, and you walk away a happy customer and the shopkeeper has made a sale with reduced likelihood of returns. The story is the same for many other products.
Fortunately for traditional e-commerce players, this equation works both ways. There are a number of advantages of an online store that a physical presence alone cannot beat. Lower inventory costs, lower operating costs, wider variety of products and wider customer reach are but only a few examples. So the newly opened corner store in the previous example may be in a better position to meet the trust issue, but there are many other value creation opportunities it could monetise if it also had an online e-commerce presence.
It is not physical or electronic. It is physical and electronic. It is time e-commerce grows up to become pe-commerce. It is time we realise we are humans after all.
The writer is Managing Partner at pi Strategy Consulting, a firm that specialises in helping client organisations with growth initiatives at the confluence of strategy and innovation.